Canada is losing control of its trade agenda

Canadian Prime Minister Justin Trudeau, right, speaks as his Vietnamese counterpart Nguyen Xuan Phuc listens at a press briefing at the Government office in Hanoi, Vietnam, Wednesday, Nov. 8, 2017. Trudeau is on an official visit to Vietnam and will be in Da Nang to attend the Asia Pacific Economic Cooperation (APEC) summit. (AP Photo/Minh Hoang)

The Trump era has seen a series of unsettling disruptions to the international trade system fostered by American leadership since 1945. Canada now faces challenging decisions on three vital trade files.

The first — renegotiating the North American Free Trade Agreement — is central, governing trade and investment with the U.S., Canada’s biggest trade partner. The second — finalizing the Trans Pacific Partnership Agreement (TPP) without the United States — puts trade with Japan and Asia in play. The third — sorting through the trade agreement with Europe (CETA) as the U.K. withdraws from the European Union — has the potential to affect bilateral deals with the U.S. As the poet John Milton observed, when “chaos umpire sits … chance governs all.”

The recent trade meetings in Da Nang, Vietnam on the revived TPP Mark II, coinciding with the Asia Pacific Economic Summit, were a turning point for Canada — and arguably a serious misstep with long-term consequences. To the Canadian public, the niceties of trade negotiations are a long way from everyday concerns, but insiders understand that Canada has a lot at stake with the TPP. Canada’s missteps in Da Nang intensely angered the Japanese delegation and their political, diplomatic and industry network in Tokyo.

TPP started as an American initiative to ‘pivot to Asia’; it originally excluded Japan and Canada. Once both countries became participants, getting all 12 nations to reach a successful conclusion was an amazing feat. The TPP pact included new chapters avoided in other negotiations and is a benchmark for other potential deals, such as Europe-Japan, the U.K.-Europe post-Brexit, the U.K.-U.S. and Japan-U.S.

No country has promoted TPP as much as Japan, and few political leaders have pressed so hard to cultivate good relations with President Donald Trump as Japanese Prime Minister Shinzo Abe. The reasons why are not mysterious: nuclear tests by North Korea, Chinese military initiatives in the South China Seas and the need to secure Japan’s military alliance with the United States. As part of his political legacy, Abe prioritizes the TPP as an effort to rejuvenate the economy and reform dated institutional practices, the so-called Third Arrow of what has been dubbed “Abenomics”. His government wants to see Japan globally relevant and not marginalized within the Asia region by a forceful China.

By not fully endorsing the trade deal in Vietnam, Canada angered the TPP partners — especially the Japanese, who fully understand that they can’t afford to let their principal ally, the U.S., see the initiative fall by the wayside.

In Asia, these political and trade machinations have another player — China. TPP was originally conceived by the Americas as a tool to contain China — or at least to put U.S. values, governance and the rule of law at the center of new trade rules for the 21st century. President Donald Trump, his cabinet and key advisers see China as the bête noire of trade policy, a predatory nation with mercantile instincts and government-sanctioned actions that permit huge trade deficits that account for much of the decay of America’s manufacturing heartland. “We have trade deficits with China that are through the roof,” Trump has said. “They’re so big and so bad that it’s embarrassing saying what the number is.” In fact, the trade deficit — $274 billion for the for the first nine months of 2017 — includes huge imports for American retailers like Walmart, a company which accounts for a huge share of China’s exports to the U.S. on its own.

China — no slouch when it comes to the game of geopolitics — has its own trade-infrastructure strategy, the ‘Silk Road’ project, otherwise known as China’s Belt Road Initiative (BRI). The project is stunning in its geographic reach and includes both maritime and land corridors across most of the Eurasian continent, from Beijing to Rotterdam. BRI also includes a new infrastructure development bank. Japan’s focus on TPP11 without the U.S. is seen as an interim project, along with the Asia-African Growth Corridor with India, a Japan-EU trade agreement and future bilateral deals with APEC countries.

What do the events in Vietnam mean for Canada’s future trade policies? To be fair, few countries have so many vital trade deals being negotiated simultaneously as Canada does. The issues involve domestic politics (e.g. the dairy and auto sectors) and affect other files, such as the Paris climate accord, a potential seat on the UN Security Council and, as always, good relations with the White House.

Canada has a history of mobilizing internal resources — politically, diplomatically and provincially — to negotiate trade deals, both within the WTO framework, the bilateral FTA with the Americans, and even the 1965 Auto Pact.

Today, few fully appreciate the extent of the Mulroney initiatives in the 1985-1989 trade negotiations with the U.S., such as establishing a cabinet trade committee chaired by the finance minister, allowing the trade negotiating team to have private meetings with political advisers to test the fallout from potential clauses and chapters, and designing a 15-sector strategy advisory committee on key industrial areas. Equally important was the personal connection between Prime Minister Brian Mulroney and U.S. President Ronald Reagan, with each man knowing the other’s preoccupations and the domestic fallout of a failure to secure a deal.

Today, with three pivotal trade deals in play, has Canada — despite consultations with advisory bodies and selected lobby groups, narrowed the key voices (mostly political) that shape long term trade policy? The events in Vietnam say, unequivocally, that the answer is ‘yes’.

This was the first misstep by Canada, and the consequences have been serious. Trumpism hasn’t been good news for global trade and global trade agreements. All leading trading nations are scrambling to advance their trade agendas, without or without the U.S., including through bilateral deals with the U.S. administration. In Vietnam, with sundry excuses and needless provocation, Canada managed to intensely annoy the Japanese — particularly Prime Minister Abe — and irritate most of the other TPP partners, with Australia being the most outspoken.

In this trade bazaar, trade negotiators receive a mandate from their political masters to proceed not only with a general mandate, but with specific attention to certain chapters that are particularly sensitive at home, or are contentious for other partners. The actual negotiations are typically surprise-free, with contentious issues noted in brackets and often left to be solved at the end when less contentious questions have been settled. Of all advanced countries, no nation does his homework as well as Japan, and no leader has been so fully engaged as PM Abe.

That is why Canada’s actions came as a surprise, why the announcement of an accepted agreement was postponed, and why Canada’s lukewarm support, at best, angered both Japan and other TPP partners, behind the scenes as well as in the media.

The federal government needs to think like a grandmaster chess player, seven to eight steps ahead of its opponents. That means homework, preparation and a lack of surprises. In these uncertain times, the best-case trade strategy is a package with Europe, a rejuvenated NAFTA and TPP11, with China (and potentially India) waiting in the wings.

The worst case is stark, but not unlikely: a CETA deal in turmoil with Brexit, with Canada on the sidelines, and the U.K. pushing hard for a bilateral with the Americans. In Asia, a TPP may be agreed to sometime in 2018, but Japan also is pushing hard for a bilateral trade agreement with the U.S. — the first for the Trump administration — with a high probability of success.

Another congressional failure may push the Trump administration to enact by executive order a withdrawal from NAFTA. At best, chances of a successful NAFTA Mark II round are 50-50. No one is better informed on this cycle of events than Japan, with its post-war preoccupation with cultivating excellent military, diplomatic, academic and business relations with the U.S.

At this stage, two questions are central: does the government know how deep a hole its actions have placed Canada in, and does it have a strategy to stop digging and start climbing? Canadians of all political stripes are wondering if trade policy is a function of domestic wedge politics or a serious play for future jobs, two-way trade and investment. Canada’s opportunity to win is at stake.

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